Mortgages  

Consumer buy-to-let

Consumer buy-to-let

Buy to-let is booming in the UK according to a recent survey. A report from Kent Reliance shows that in the past year 77 per cent of new households formed were in the private rented sector (PRS).

It also reports that the value of the PRS was £990bn in 2014 and is likely to have already passed the £1tn mark in the first half of 2015. It argues that as people struggle to get on to the housing ladder, the PRS is booming as would-be first-time buyers compete for the best rental properties.

Box 1 shows some of the figures behind the growth of the sector. Mortgage rates are down as lenders compete to gain more business, enabling canny buy-to-let borrowers to refinance and fix attractive rates.

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But in seeking to align the UK mortgage regime with the EU’s Mortgage Credit Directive (MCD) a new category of buy-to-let borrowing has been created: consumer buy-to-let.

According to the MCD a consumer buy-to-let contract is one not entered wholly or predominantly for the purpose of a business.

Appropriate arrangement

The UK is obliged to comply with the MCD by 21 March 2016, or face the consequences. However, member states are allowed to exclude buy-to-let from the new regime provided they put in place an appropriate alternative arrangement.

Arguing that the MCD offered few benefits to UK consumers beyond the high level of protection already provided by the existing FCA regime, HM Treasury simply chose to make an appropriate alternative arrangement.

Currently buy-to-let lending is unregulated by the FCA except where the loan is secured on the borrower’s home or where the borrower or a relative occupies at least 40 per cent of the property.

However, the MCD’s criteria are stricter, defining a buy-to-let mortgage as one that includes a contract that does not allow the property to be occupied by the borrower or a family member at any time.

In its consultation paper on implementing the directive, the Treasury argues that most buy-to-let transactions in the UK are carried out on a business basis, so the consumer protections of the FCA are not appropriate.

Consequently, Jeni Browne, Head of Buy-to-let and Regulated Lending at Mortgages for Business describes the effect that the MMR has had on buy-to-let mortgages as “negligible – a bit of tinkering around affordability for most lenders”. That is in real contrast to the stricter criteria, especially around affordability for regulated mortgages.

Accidental landlords

The Treasury estimates that around 11 per cent of buy-to-let mortgages, about 1,800 a year, could be described as consumer buy-to-let. So effectively it is the so-called “accidental landlords” who are likely to be affected by this legislation.

Where, for example, they have bought a property but failed to sell the previous one, or inherited a property and failed to sell it, but in both instances decided to rent the additional property out. Then all the strict lending and affordability criteria of the MMR would apply.

So what sort of effect would that have on the products? Browne suggests that the products will be pretty much the same as non-regulated buy-to-let loans, except that each application will be underwritten along the same regulated lines as standard residential mortgages, “so affordability will be a big factor and the paperwork will grow,” she adds.